The latest issue of The International Economy magazine features a collection of 32 short opinions by analysts on both sides of the Atlantic, on the historic significance of the NextGenerationEU deal of July 21 and whether it represents a "Hamiltonian" moment. Here is the PDF version of the entire series. The text of my contribution is below. I also commented on the whole series on Twitter.
The EU budget deal of July 21 marks a historic moment, because it’s the first time that the European Union has acquired significant financial firepower of its own. (There was something of that in the original European Coal and Steel Community of the early 1950s, but it was small in scale and soon phased out.) The debt issuance capacity will establish the European Union as a significant player in official bond markets, in the same league as large EU member states in terms of volumes and liquidity over the next few years.
As for semantics, irrespective of whether the moment is deemed Hamiltonian or not—keeping in mind that the institutional development path of the European Union is completely different from that of the United States—that EU debt deserves to be called a Eurobond. Eurobonds were the matter of much debate over the past decade, and widely considered utopian (including by this observer) until German Chancellor Angela Merkel’s astounding volte-face on May 18, 2020. That’s when she and French President Emmanuel Macron jointly announced their support for what has now become the stimulus package, or in Brussels jargon, NextGenerationEU.
Of course, the official discourse is different: the EU issuance is proclaimed to be a one-off process that does not set a precedent, is thus not a permanent feature, and is thus not a Eurobond. In the short term, this discourse is necessary to ensure political consensus. But investors have already seen through it.
Once established in the financial landscape, EU debt will become such a central reference in the EU financial system that recurring recourse to it will be obviously preferable to alternative options—including but not limited to partial refinancing of the NextGenerationEU debt itself when it comes due.
Euro taxes—or in Brussels jargon, “own resources”— will be discussed for that debt’s reimbursement, and there’s an ultimate backstop from member states, but the volumes at stake are large enough that full reimbursement without any refinancing won’t be the optimal way to deal with it, either from a political or financial standpoint. And new needs will come up for which more EU debt will be the best financing option.
Does that imply fiscal profligacy? Probably not. EU spending financed by EU debt will be more tightly controlled than national spending in many member states, for which it will partly substitute. Meanwhile, the risk of euro area break-up has been dramatically reduced. As a consequence, euro area sovereign spreads are permanently compressed, because that “redenomination risk” accounted for much of the spread volatility of the last decade.
But another medium-term consequence of the emergence of EU debt as the reference safe asset is likely to be more junior status for national sovereign debt, resulting in tighter market discipline. If so, that should be viewed not as a bug, but as a feature.
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